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Gordon Adams: Sequestration Will Not Happen

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Gordon Adams is a former Clinton administration defense budget analyst and has written extensively on the current “fiscal cliff” crisis. The Naval Institute interviewed him on 28 November to get his take on sequestration and the defense budget. Adams is speaking today at the Naval Institute’s Defense Forum Washington.

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Can you put current sequestration in a historical context? Has anything like this happened before?

Yes, but never to this extent.

The sequestration mechanism was lifted wholesale from a 1985 bill called Graham Rudman Hollings. When it was passed in 1985 it was the last big U.S. effort in deficit and debt reduction. The sequestration mechanism was defined in that bill. . . . There were sequestrations under Graham Rudman Hollings. They were rather small, they were not on this order of magnitude, because this one actually sets targets, but they did happen. Once they happened, Congress reversed it. Basically fixed it, patched the hole. So that happened and they went away. It maybe one precedent for what would happen in January if there is a sequester. I don’t think we will, but if we do . . .

What we have here is an unprecedented showdown at the O.K. Corral.

What about the existing sequestration measures?

One, I don’t think it’s going to happen. The whole purpose for the sequester was to have it not happen. When the Budget Control Act  passed in August of 2011 and they named this “super committee,” I wrote at the time that the super committee was doomed to failure because no one wants to solve this problem now. The fact they made the date 2 January 2013 as the date said to me: After the election, this is all about the election. . . . It all depended on the outcome of the election.

What is the worst-case scenario if sequestration occurs?

I wouldn’t call it the worst-case scenario. I would call it the scenario. I see the fiscal cliff more as a fiscal slope, especially as it applies to defense. The people in uniform are not affected at all because the President has already taken them off the table.

Are you referring to pay and benefits?

Pay and benefits, the President has taken them off the table and by law he can do that. . . . Everyone in uniform: stand down, at ease, not you.

How about the defense industry?

The industry, which is the loudest voice of gloom and doom is probably the least affected in the near-term. I say that because the industry works off existing contracts. Those contracts are already funded under appropriations for prior years. Sequester does not touch obligated funds for contracts from prior years. So the impact on industry would be at best slow. The only part of the existing contracts that might affected be the unobligated funds. The Pentagon has about $70 to $80 billion in unobligated funds in the procurement and [research and development] arena. Those are prior year appropriations that haven’t been obligated and they would be affected by a sequester to the tune of 10 percent. That becomes more of a management issue than a severe-impact issue. I’ve talked with program managers at the Pentagon about this and they basically say, “If I have to manage my program with 10 percent less funds, I can do that. That’s what they pay me for.”

What gets hit is anticipated business, and industry has already figured that that is going down. They’ve been thinking that for two years, long before sequester. They can see that we are really in a drawdown and what happens in a drawdown is that [defense] acquisition money goes down more deeply than the overall budget. The industry has been to this movie several times. They know the pattern. . . . Industry is very adaptive. It is also very good at propaganda. [Aerospace Industries Association] has been jumping up and down, commissioning studies and sending people out saying that the sky is falling. But the reality is when you talk to the CEOs, they say “It’s alright. We’re going to get through this. It’s not going to be business as usual.” But business as usual is if budgets are flat or growing and these budgets are coming down. This is no Armageddon. This is not doomsday.

Would any defense enterprise be truly effected in the event of a sequester?

There are two areas that are affected by the possibility of a sequester. One is services contracting and the other is civilian personnel. Both of those are in the operations and maintenance accounts [O&M]. O&M under the sequester, according to the Office of Management and Budget and the Department of Defense, is going to be treated at the account level. What it means when you get to O&M is Army, Navy, Marines and Air Force O&M, that’s everything. With O&M being a third of the budget, it gives you a tremendous amount of fungibility. Focus on O&M in Afghanistan, you protect that piece and you go over and what you end up touching, probably, is services contractors.That could affect the business fortunes not so much of the big defense contractors, but the services contractors, KBR and people like that.

If you don’t think sequestration is going to happen but you think the Defense budget is coming down what does the future look like?

The first ten years after Korea, the Cold War, and Vietnam all cluster at around a 30 percent reduction in defense spending. It’s not unreasonable to use those as an example for what might happen.